Ford GT at the Regent Street Motor Show London 2018. Flickr Image.
Ford Motor Company (NYSE:F) is a leading automaker that specializes in the design and manufacture of cars, trucks and SUVs.
Ford operates thousands if not hundreds of offices and factories all around the world and employs more than 186,000 people globally.
For this reason, Ford Motor Company has huge expenses to cover as the company is running a capital-intensive business that requires loads of working capital on a daily basis.
That said, Ford’s liquidity is of the utmost importance to the company due mainly to the capital-intensive nature of the business.
In this article, we will analyze Ford’s short-term liquidity from the perspective of 3 ratios, and they are:
Let’s check them out!
Ford Motor’s Current Ratio
Ford Motor’s current ratio
The current ratio is one of the metrics that measure a company’s short-term liquidity.
The ratio takes the total current assets and divides them by the total current liabilities as shown in the following equation.
Current Ratio = Current Assets / Current Liabilities
The current ratio equation shows that a ratio above 1.0 indicates adequate short-term assets coverage over the total current liabilities.
On the other hand, a ratio that is below 1.0X indicates insufficient asset coverage for the entire current liabilities within the next 12 months.
That said, the company may have liquidity issues and has a greater risk of going out of business if the ratio continues to stay below the 1.0X levels for a prolonged period.
This situation is further worsened when the respective company does not have a strong cash flow, ie. positive operating and free cash flow.
All told, Ford Motor seems to have no liquidity issues as seen from the current ratios that have been above 1.0X since fiscal 2017 as shown in the chart above.
More importantly, Ford’s current ratio of 1.16X reported in the 2nd quarter of 2022 suggests that the company should have enough liquid assets to cover the total short-term liabilities that come due within a year from now to 2023.
A trend worth mentioning is that Ford’s current ratio shot up considerably to 1.25X in 1Q 2020 and the ratio continued to go higher in 2Q 2020 to more than 1.30X.
The higher ratio in fiscal 2020 means that Ford had shored up its liquidity in response to the COVID-19 crisis that may have disrupted the company’s supply chain and negatively impacted the automotive business.
Ford increased its liquidity considerably during the outbreak to maintain its financial flexibility.
In fiscal 2021, Ford’s current ratio has normalized to the pre-pandemic level which was at 1.20X.
All in all, Ford should have enough liquid assets to pay for the short-term liabilities that come due in a year or less in 2023.
Ford Motor’s Working Capital
Ford Motor’s working capital
The working capital indicates the excess liquid assets that a company has after accounting for all current liabilities that come due in the next 12 months.
In Ford Motor’s case, the company has over $15 billion of working capital in each quarter between fiscal 2017 and 2022.
Ford’s working capital averages around $20 billion on a historical basis and this number shot up considerably to more than $30 billion during fiscal 2020 as shown in the chart above.
As mentioned, the higher working capital ratio during the pandemic was expected as Ford was trying to maintain its liquidity needs by hoarding a large amount of cash on hand.
In the post-pandemic period, Ford’s working capital has normalized to its pre-pandemic level and the ratio came in at $14 billion as of fiscal 2022 Q2.
Keep in mind that the excess working capital reported in 2Q 2022 could be in the form of cash, securities, inventories, receivables or any other short-term assets that Ford carried in its balance sheets.
More importantly, Ford’s $14 billion of working capital reported in fiscal 2022 2Q was a huge sum and could be used for any corporate purposes going forward.
In line with the current ratio that we saw earlier, Ford Motor should have no liquidity issues going forward and the number of liquid assets should be sufficient to cover all short-term liabilities given the huge amount of working capital reported in 2Q 2022.
Ford Motor’s Quick Ratio
Ford Motor’s quick ratio
The quick ratio is calculated based on the equation below:
Quick Ratio = Adjusted Current Assets / Total Current Liabilities
Therefore, the quick ratio is almost identical to the current ratio except for the current asset portion where it is adjusted to strip off semi-liquid assets such as inventories and prepaid expenses.
What is left off in the adjusted current asset portion are highly liquid assets such as cash and cash equivalents, marketable securities and receivables.
Similar to the current ratio, a quick ratio above 1.0X indicates sufficient liquidity whereas a ratio below 1.0X shows insufficient liquid assets.
All told, Ford’s quick ratio as seen in the chart above has been above 1.0X for the period from fiscal 2017 to 2022.
Therefore, Ford’s liquid assets have been sufficient to cover all short-term liabilities all this while, including in the latest period in fiscal 2022 2Q.
As of 2022 Q2, Ford’s quick ratio hovered at 0.96X, illustrating that the company has the bare minimum of liquid assets to pay for the entire short-term liabilities.
Similar to the scenario we saw in early discussions, Ford’s quick ratio increased substantially in fiscal 2020 to nearly 1.20, suggesting a deliberate move by the company to boost its liquid assets in response to the COVID-19 pandemic.
However, Ford’s quick ratio declined in subsequent quarters in fiscal 2022, indicating that the company’s liquid assets, particularly cash and cash equivalents, have normalized to their pre-pandemic levels.
Despite stripping off some of Ford’s assets such as inventories and prepaid expenses in the measurement of the quick ratio, the company seems to have been able to cover all of its short-term liabilities using only cash and cash equivalents, marketable securities, etc.
More importantly, Ford’s latest quick ratio reported in 2022 2Q indicates sufficient liquidity in the next 12 months or a year.
Conclusion
Ford Motor Company (NYSE:F) is an auto manufacturer that operates a capital-intensive automotive design, manufacturing and distribution business.
Therefore, liquidity is of the utmost importance to the company.
Based on the current ratio of 1.16X reported in 2022 Q2, Ford has ample liquidity to take care of all liabilities that come due in the next 12 months.
In terms of working capital, Ford has $14 billion in excess liquid assets as of 2022 2Q ranging from cash, and inventories to receivables.
This figure suggests Ford’s adequate liquid assets that could pay for the company’s entire short-term liabilities that come due within the next 12 months.
The quick ratio is another liquidity ratio that measures Ford’s ability to cover its coming liabilities.
However, the quick ratio is more stringent compared to the current ratio as it excludes certain semi-liquid assets such as inventories and prepaid expenses.
That said, Ford has a quick ratio of 0.96X as of 2022 Q2 and this ratio also indicates the company’s sufficient liquid assets such as cash and cash equivalents as well as marketable securities which will be enough to cover the entire current liabilities that come due in the next 12 months.
Credits And References
1. All financial data in this article was obtained and referenced from Ford’s financial statements available in Ford’s Earnings Releases.
2. Featured images in this article are used under creative commons licenses and sourced from the following websites: mangopulp2008 and Thomas Hawk.
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